A Strategic Exit for an SME
Updated: Apr 18, 2019
Today saw the announcement of the acquisition of the manufacturers of the low-sugar fermented sweetened tea drink MOJO kombucha for an undisclosed sum.
We can make a broad assumption that the price was sufficient to present a more attractive option than the owners continuing it alone - and in that sense I have assumed it was a sold at a premium to market value.
It is entirely possible that the owners decided growth past the current $5m - $7m revenue range was easier with someone like Coca-Cola Amatil rather than compete against it. However it is safe to say this was a strategic acquisition.
This is somewhat supported by the statement...." The two companies hope to use Coca-Cola's reach and expertise to "supercharge" MOJO's sales of the increasingly popular drink, while also diversifying Coca-Cola's portfolio as consumers turn away from its core range of high-sugar products".
What is rare is the enormously large size difference between the two companies. I am often asked to approach large multinationals and listed entities with billions in revenue to purchase businesses with less than $2m in revenue. I once approached an ASX listed entity in the onsite services area with revenue in excess of $6b about the acquisition of a small business with revenue of $1.5m. The key reason I was encouraged by the SME owner to do this was because he had previously worked with the CEO - some 30 years ago.
It was a tenuous and remote link, there was no significant competitive advantage to gain, no increase in scale to achieve and no specific IP to leverage. And, as I expected, it failed. I made the approach so I could say to the client "I gave it a shot".
I have since had many clients ask me to approach potential buyers based on the reasoning that surely such a large company will value a highly profitable, albeit small, business. The answer is almost always NO.
And the kombucha acquisition confirms this approach - a significantly large multinational or ASX-listed company will only consider small acquisitions where:
There is a new product or service that has already been established within a comparable market.
There is significant and comparable scale that can be achieved.
There is significant technology or IP that can be leveraged on the SAME SCALE as the market of the acquirer.
There is a new market trend that the SME has already addressed
There is nothing wrong with the long term strategy of:
Identifying an unmet market need or new market trend.
Developing IP to address the unmet market need.
Securing a market share that demonstrates the full market potential.
Implementing enough capacity to show that scale is easily achieved.
Develop the SME to be attractive for an acquisition.
This task is often a 5 - 10 year process. It has taken MOJO nearly 10 years. Don't underestimate the work and the time required to achieve this outcome.
But also don't expect miracles - MOJO created all these features in their business so that CCA was confident that an acquisition would make a real and credible difference to their business. Take a realistic look at your business features before you say the ever-hopeful phrase "...surely a big company would want to acquire us for an attractive sum?".
If you are planing to exit your business and need to rely on the value of your business to retire, or are focused on creating a high value business with a strategic exit, then be prepared and identify the features your business needs to attract that "miracle offer".
Get really clear on why you are in business, what value do you create for your customers and where is your business heading.